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India Equity Research Reports, IPO and Stock News
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Oil on the boil
Severe winter season in the US and Europe followed by
unrest in the north African region (spreading to the Middle-
East) along with earthquake in Japan led to oil prices
surging (Brent is currently around US$115/bbl). Healthy
petroleum product cracks lent support to refining margins
which also witnessed gradual improvement over the past
5-6 months. However, higher crude prices pushed up
under-recoveries of domestic OMCs which are unable to
pass on the crude price rise to customers. We believe crude
prices will sustain in the near future which will have a
subsequent impact on crude import bill, along with cash
dole out/ oil bonds to the OMCs to maintain their financial
health.
Crude decisively breaches US$100/bbl….: Global turmoil
led crude prices to breach US$100/bbl mark during Q4FY11
which averaged ~US$105/bbl (Brent). Political unrest in
Egypt and Libya (3% of global oil production) supported the
up move in crude. The issue of Nuclear power in Japan is
also supporting high crude prices. We believe crude prices
will cool off in the medium term and average US$95/bbl in
FY12E.
.…however, refining margins have improved: Following
higher crude prices, refining margins have also moved up in
tandem. Reuters Singapore complex GRMs for the quarter
averaged US$7.3/bbl against US$5.5/bbl in Q3FY11 and
US$4.6/bbl in 9MFY11.
Under-recoveries to cross FY09 levels in FY12E: Strong
crude prices, along with healthy crack spreads, are likely to
inflate under-recoveries in FY12E surpassing the earlier high
of FY09 (about Rs1,032bn). To support the OMCs and to
reduce its own burden (by cash dole out/ oil bonds), the
government will have to resort to price hike in diesel and
LPG during FY12E. We estimate under-recoveries to mount
to Rs999bn and Rs1,036bn in FY12E and FY13E as against
Rs800bn in FY11E.
Neutral on OMCs, relatively positive on upstream
companies: OMCs are likely to suffer from higher
under-recoveries, even though they would enjoy marginal
benefit from healthy GRMs; hence we turn neutral from our
earlier positive stance on OMCs. Even if subsidies remain
relatively higher, the upstream companies are likely to
report better performance due to volume growth. Private
players are likely to benefit – RIL from a healthy GRM
environment and Cairn from strong crude prices.
Political turmoil pushing up crude prices
Brent crude is currently hovering around US$110-115/bbl and has reached its highest level since
September 2008. In Q4FY11 so far, the average price of Brent crude has been US$105/bbl
compared to US$87/bbl in Q3FY11. Since Oct 2010 we have seen a consistent rise in Brent crude.
This year’s severe winter was one of the factors which led to the upward pressure, but the primary
reason was the geo-political tension surrounding the two North African countries, Egypt and
Libya. Egypt and Libya jointly contribute ~3% of the global crude production (Egypt: 0.8mbpd and
Libya: 1.7mbpd).
Despite the end of the winter season when crude demand is high, the fears of continuing
disruption in crude production from Libya and spread of political unrest to other Middle-East
countries can push up crude prices even further.
Given the current scenario, we revise our crude price assumptions to US$95/bbl in FY12E and
US$97/bbl in FY13E. Also, we have raised our long term crude oil price assumption from earlier
US$95/bbl to US$100/bbl from FY14E onwards.
GRMs – strong support by distillates
Gross refining margins (GRM) have been favoring the refining segment. Product prices have
increased in tandem with rising crude prices. Diesel and jetkero spreads witnessed the maximum
increase (Q4FY11 vs Q3FY11) of 38%-40%, followed by gasoline at ~20%.
Earth quakes in Japan have led to a shut down of ~1.6mbpd refining capacity of the total of
~4.6mbpd, thus increasing its reliance on imports to meet energy requirements. This event has
spiked product spreads, especially that of diesel which are ranging in between US$22-25/bbl
(two-and-a-half-year high). In the domestic space, such a scenario will be beneficial to the export
oriented refiners including RIL and Essar and also partly help PSU refiners.
GRM for Q4FY11 is averaging US$7.3/bbl compared to US$5.5/bbl in Q3FY11.
Under-recoveries – possibility of new highs
In spite of the high refining margins, the domestic oil PSUs will not be able to enjoy that benefit
due to regulated prices. Post the decision on petrol de-regulation and other petro-product price
hike on June 26, 2010, crude prices have risen by more than 50%. This has made the situation
worse for OMCs. The Government is unable to raise prices further on these products due to
political and economic pressures. Following the revision in crude price assumption, we have
revised upwards our under-recoveries estimates.
During 9MFY11 the total under-recoveries were ~Rs45bn. We expect the sharing between
Government, upstream PSUs and OMCs to follow historical trends. However, the quantum of
increase in under-recoveries is likely to put additional pressure on the companies that are sharing
the burden, as well as the Government.
Impact on companies
Given the current scenario, we believe that the private players will benefit the most. Cairn India
which is a pure crude play will gain from higher realizations on account of change in our crude
price estimates and RIL from the healthy GRM environment.
OMCs are likely to suffer from higher under-recoveries while the upstream PSU contribution to the
total subsidy burden is also likely to increase. However, the net effect will be marginal for the
upstream companies as their realization would increase due to high crude oil prices.
BPCL
We believe that the BPCL is likely to suffer from adverse under-recoveries environment due to
higher crude oil prices in FY12E and FY13E. Hence, the earnings are likely to get impacted
with further impact on valuation multiples. We have thus changed our P/BV multiple for
BPCL’s core business from 1.3x earlier to 1.2x. Subsequently, our price target stands revised at
Rs604(earlier TP Rs654). We have also changed our recommendation accordingly from Buy to
Hold.
HPCL
We believe that the HPCL is likely to suffer from adverse under-recoveries environment due to
higher crude oil prices in FY12E and FY13E. HPCL, with its higher dependence on market
purchases for petroleum products is likely to get impacted. Higher under-recoveries hurt
HPCL’s performance the most with negative impact on valuation multiples. We have thus
changed our P/BV multiple for HPCL’s core business from 0.9x earlier to 0.8x. Subsequently,
our price target stands revised at Rs358(earlier TP Rs440). We have also changed our
recommendation accordingly from Buy to Hold).
IOCL
Higher under-recoveries have relatively lower impact on IOC as part of IOC’s profits are
contributed by its petchem segment. Nonetheless, we believe that the IOC’s earnings are
likely to get impacted due to higher under-recoveries in FY12E and FY13E. We have thus
changed our P/BV multiple for IOC’s core business from 1.1x earlier to 1.0x. Subsequently, our
price target stands revised at Rs336(earlier TP Rs360). We have also changed our
recommendation accordingly from Buy to Hold.
GAIL
We continue to remain positive on GAIL’s transmission business. Even if GAIL’s subsidy
burden is likely to be higher in FY12E and FY13E, its strong performance from gas
transmission and petchem segment would make up for incremental subsidy burden. We thus
continue to remain positive on GAIL with our Buy rating and target price of Rs568.
ONGC
ONGC’s subsidy burden is likely to go up substantially with the revision in our crude oil price
assumption for FY12E and FY13E. The benefit of incremental crude price would be entirely
passed on to the OMCs through higher discounts without any substantial impact on the
earnings for the company. Even if ONGC’s net realisation from domestic crude is likely to be
lower, the company would earn higher realisations from its overseas crude sales thus
mitigating the earnings impact. However, higher subsidy burden remains a concern and
hence we have revised our target P/E multiple for ONGC from earlier 11.0x to 10.5x. We
continue to maintain our Buy rating with a revised target price of Rs367 (earlier TP Rs375).
OIL
OIL’s subsidy burden is likely to go up with the revision in our crude oil price assumption for
FY12E and FY13E. However, we believe that the company would be marginally benefitted
from higher oil prices. However, higher subsidy burden remains a concern and hence we have
revised our target P/E multiple for OIL from earlier 10.0x to 9.5x. We continue to maintain our
Buy rating with a revised target price of Rs1,626 (earlier TP Rs1,588).
RIL
Based on the strong GRMs environment, we have revised our GRMs estimates for RIL for
FY12E from US$9.6/bbl to US$10.0/bbl and FY13E from US$10.0/bbl to US$10.3/bbl. However,
the crude oil price estimate change is likely to have very marginal impact on the earnings of
RIL. Based on our changed estimates, our revised target price stands at Rs1,106 (earlier TP
Rs1,089) and we maintain our Hold rating on the stock.
CAIRN
The direct beneficiary from our crude oil price estimate revision is Cairn which is likely to get
positively impacted with over 16.0% earnings revision for FY12E and 10.3% earnings revision
for FY13E. We thus maintain our Buy rating with a revised target price of Rs409 (earlier TP
Rs362).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil on the boil
Severe winter season in the US and Europe followed by
unrest in the north African region (spreading to the Middle-
East) along with earthquake in Japan led to oil prices
surging (Brent is currently around US$115/bbl). Healthy
petroleum product cracks lent support to refining margins
which also witnessed gradual improvement over the past
5-6 months. However, higher crude prices pushed up
under-recoveries of domestic OMCs which are unable to
pass on the crude price rise to customers. We believe crude
prices will sustain in the near future which will have a
subsequent impact on crude import bill, along with cash
dole out/ oil bonds to the OMCs to maintain their financial
health.
Crude decisively breaches US$100/bbl….: Global turmoil
led crude prices to breach US$100/bbl mark during Q4FY11
which averaged ~US$105/bbl (Brent). Political unrest in
Egypt and Libya (3% of global oil production) supported the
up move in crude. The issue of Nuclear power in Japan is
also supporting high crude prices. We believe crude prices
will cool off in the medium term and average US$95/bbl in
FY12E.
.…however, refining margins have improved: Following
higher crude prices, refining margins have also moved up in
tandem. Reuters Singapore complex GRMs for the quarter
averaged US$7.3/bbl against US$5.5/bbl in Q3FY11 and
US$4.6/bbl in 9MFY11.
Under-recoveries to cross FY09 levels in FY12E: Strong
crude prices, along with healthy crack spreads, are likely to
inflate under-recoveries in FY12E surpassing the earlier high
of FY09 (about Rs1,032bn). To support the OMCs and to
reduce its own burden (by cash dole out/ oil bonds), the
government will have to resort to price hike in diesel and
LPG during FY12E. We estimate under-recoveries to mount
to Rs999bn and Rs1,036bn in FY12E and FY13E as against
Rs800bn in FY11E.
Neutral on OMCs, relatively positive on upstream
companies: OMCs are likely to suffer from higher
under-recoveries, even though they would enjoy marginal
benefit from healthy GRMs; hence we turn neutral from our
earlier positive stance on OMCs. Even if subsidies remain
relatively higher, the upstream companies are likely to
report better performance due to volume growth. Private
players are likely to benefit – RIL from a healthy GRM
environment and Cairn from strong crude prices.
Political turmoil pushing up crude prices
Brent crude is currently hovering around US$110-115/bbl and has reached its highest level since
September 2008. In Q4FY11 so far, the average price of Brent crude has been US$105/bbl
compared to US$87/bbl in Q3FY11. Since Oct 2010 we have seen a consistent rise in Brent crude.
This year’s severe winter was one of the factors which led to the upward pressure, but the primary
reason was the geo-political tension surrounding the two North African countries, Egypt and
Libya. Egypt and Libya jointly contribute ~3% of the global crude production (Egypt: 0.8mbpd and
Libya: 1.7mbpd).
Despite the end of the winter season when crude demand is high, the fears of continuing
disruption in crude production from Libya and spread of political unrest to other Middle-East
countries can push up crude prices even further.
Given the current scenario, we revise our crude price assumptions to US$95/bbl in FY12E and
US$97/bbl in FY13E. Also, we have raised our long term crude oil price assumption from earlier
US$95/bbl to US$100/bbl from FY14E onwards.
GRMs – strong support by distillates
Gross refining margins (GRM) have been favoring the refining segment. Product prices have
increased in tandem with rising crude prices. Diesel and jetkero spreads witnessed the maximum
increase (Q4FY11 vs Q3FY11) of 38%-40%, followed by gasoline at ~20%.
Earth quakes in Japan have led to a shut down of ~1.6mbpd refining capacity of the total of
~4.6mbpd, thus increasing its reliance on imports to meet energy requirements. This event has
spiked product spreads, especially that of diesel which are ranging in between US$22-25/bbl
(two-and-a-half-year high). In the domestic space, such a scenario will be beneficial to the export
oriented refiners including RIL and Essar and also partly help PSU refiners.
GRM for Q4FY11 is averaging US$7.3/bbl compared to US$5.5/bbl in Q3FY11.
Under-recoveries – possibility of new highs
In spite of the high refining margins, the domestic oil PSUs will not be able to enjoy that benefit
due to regulated prices. Post the decision on petrol de-regulation and other petro-product price
hike on June 26, 2010, crude prices have risen by more than 50%. This has made the situation
worse for OMCs. The Government is unable to raise prices further on these products due to
political and economic pressures. Following the revision in crude price assumption, we have
revised upwards our under-recoveries estimates.
During 9MFY11 the total under-recoveries were ~Rs45bn. We expect the sharing between
Government, upstream PSUs and OMCs to follow historical trends. However, the quantum of
increase in under-recoveries is likely to put additional pressure on the companies that are sharing
the burden, as well as the Government.
Impact on companies
Given the current scenario, we believe that the private players will benefit the most. Cairn India
which is a pure crude play will gain from higher realizations on account of change in our crude
price estimates and RIL from the healthy GRM environment.
OMCs are likely to suffer from higher under-recoveries while the upstream PSU contribution to the
total subsidy burden is also likely to increase. However, the net effect will be marginal for the
upstream companies as their realization would increase due to high crude oil prices.
BPCL
We believe that the BPCL is likely to suffer from adverse under-recoveries environment due to
higher crude oil prices in FY12E and FY13E. Hence, the earnings are likely to get impacted
with further impact on valuation multiples. We have thus changed our P/BV multiple for
BPCL’s core business from 1.3x earlier to 1.2x. Subsequently, our price target stands revised at
Rs604(earlier TP Rs654). We have also changed our recommendation accordingly from Buy to
Hold.
HPCL
We believe that the HPCL is likely to suffer from adverse under-recoveries environment due to
higher crude oil prices in FY12E and FY13E. HPCL, with its higher dependence on market
purchases for petroleum products is likely to get impacted. Higher under-recoveries hurt
HPCL’s performance the most with negative impact on valuation multiples. We have thus
changed our P/BV multiple for HPCL’s core business from 0.9x earlier to 0.8x. Subsequently,
our price target stands revised at Rs358(earlier TP Rs440). We have also changed our
recommendation accordingly from Buy to Hold).
IOCL
Higher under-recoveries have relatively lower impact on IOC as part of IOC’s profits are
contributed by its petchem segment. Nonetheless, we believe that the IOC’s earnings are
likely to get impacted due to higher under-recoveries in FY12E and FY13E. We have thus
changed our P/BV multiple for IOC’s core business from 1.1x earlier to 1.0x. Subsequently, our
price target stands revised at Rs336(earlier TP Rs360). We have also changed our
recommendation accordingly from Buy to Hold.
GAIL
We continue to remain positive on GAIL’s transmission business. Even if GAIL’s subsidy
burden is likely to be higher in FY12E and FY13E, its strong performance from gas
transmission and petchem segment would make up for incremental subsidy burden. We thus
continue to remain positive on GAIL with our Buy rating and target price of Rs568.
ONGC
ONGC’s subsidy burden is likely to go up substantially with the revision in our crude oil price
assumption for FY12E and FY13E. The benefit of incremental crude price would be entirely
passed on to the OMCs through higher discounts without any substantial impact on the
earnings for the company. Even if ONGC’s net realisation from domestic crude is likely to be
lower, the company would earn higher realisations from its overseas crude sales thus
mitigating the earnings impact. However, higher subsidy burden remains a concern and
hence we have revised our target P/E multiple for ONGC from earlier 11.0x to 10.5x. We
continue to maintain our Buy rating with a revised target price of Rs367 (earlier TP Rs375).
OIL
OIL’s subsidy burden is likely to go up with the revision in our crude oil price assumption for
FY12E and FY13E. However, we believe that the company would be marginally benefitted
from higher oil prices. However, higher subsidy burden remains a concern and hence we have
revised our target P/E multiple for OIL from earlier 10.0x to 9.5x. We continue to maintain our
Buy rating with a revised target price of Rs1,626 (earlier TP Rs1,588).
RIL
Based on the strong GRMs environment, we have revised our GRMs estimates for RIL for
FY12E from US$9.6/bbl to US$10.0/bbl and FY13E from US$10.0/bbl to US$10.3/bbl. However,
the crude oil price estimate change is likely to have very marginal impact on the earnings of
RIL. Based on our changed estimates, our revised target price stands at Rs1,106 (earlier TP
Rs1,089) and we maintain our Hold rating on the stock.
CAIRN
The direct beneficiary from our crude oil price estimate revision is Cairn which is likely to get
positively impacted with over 16.0% earnings revision for FY12E and 10.3% earnings revision
for FY13E. We thus maintain our Buy rating with a revised target price of Rs409 (earlier TP
Rs362).
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